The Friday, November 28, 2014 online edition of Barrons included a story written by Tiernan Ray on the outlook for this year’s holiday buying season for consumer PCs. The title of the story is Intel, AMD: This Is the Beginning of the Consumer PC Recovery, Says Wells. The article is written around comments from an analyst at Wells Fargo, David Wong about the condition of the consumer PC market. Wong’s comments, in turn, are based on comments made by HP CEO Meg Whitman, which she voiced during an interview on CNBC. The CNBC interviewer was David Farber.

Whitman’s comments: “We saw pretty strong results from the consumer in the fourth quarter and again, I think it’s a refresh cycle” in my opinion are conservative. The key phrase, for me, is “refresh cycle”. But perhaps renewed consumer interest in PCs goes beyond merely refresh cycle replacement of existing equipment. After all, with laptops running Windows 8.1 available from HP at a cost of a mere $229.00, it’s difficult to see how some segment of the tablet market (not to mention the Chromebook market) won’t pause to think long and hard before plunking down cash on a device without a keyboard and a much higher retail price.

If this segment of the tablet market converts into buyers of ultra low cost PCs, then, in my opinion, we will be looking at something more than simply a refesh cycle. Bottom line: with an improved Microsoft Windows 8.1 O/S, a keyboard, reasonably light weight, and manageable dimensions, these low end laptops represent a much better deal than their tablet competition for consumers in need of a computing experience (as opposed to simply a home entertainment smart box).

Microsoft certainly stands to benefit from any uptick in the consumer segment. One can argue the cost of the Windows 8.1 O/S for OEMs marketing these ultra low cost PCs is likely to be a giveaway, but the opportunity opened for sales of Office 365 Personal, Office Pro Plus, etc. shouldn’t be discounted.

PC manufacturers, across the board, including Dell, have reported better sales results over the last several quarters. We think this trend will continue for the near-term future (meaning at least through to Q2 2015). We see four factors at work, which promise to continue to drive new PC purchases:

developer community acceptance and implementation of Microsoft’s API and SDK strategies, which will deliver more computing features to PC owners, thereby narrowing the feature gap between Windows, OSX, and Android PCs

Here’s some point by point detail: 1) with the 2014 holiday buying season, consumers are finally able to purchase PCs powered by Windows 8.1 at price point parity with Google Chromebooks. At $199.99 the HP Stream is, arguably, an affordable option for the widest possible consumer segment requiring a Microsoft Windows computing experience. In what we can only call a major achievement for Microsoft, HP’s low end Chromebook entry, the HP Chromebook 14 carries a street cost nearly 50% higher than the HP Stream 11.

Now to the second of our four points: The difference in computing experience quality between Windows 8.0 and Windows 8.1 is substantially. It is not likely enterprise buyers have satiated their appetite for new PCs. Further, another year has passed on the PC lifecycle, so even more older PCs will have to be upgraded. Windows 8.1 resolves many of the Windows 8 issues enterprise buyers complained about, so it is likely the uptick in PC buying will continue for some more time to come.

Consumers looking for a better PC computing experience at a reasonable cost still have the best opportunity to meet their objectives with a PC running Microsoft’s Windows O/S. So the mid to high end of the PC market, meaning the segment requiring solid state drives, HD monitors and matching graphics, etc, are more likely to stick with Wintel than to gravitate to OSX PCs.

Finally, Microsoft’s decision to release a number of APIs and SDKs empower app developers to build Office 365, and even hooks to Azure into their solutions. As developers consume these new tools, consumers should be able to use Wintel PCs to consume a lot of the apps, heretofore, only available via Android, or iOS devices. Effectively the feature (and, one can argue, the entire computing experience) gap between device architectures should narrow, which should further pump up PC sales for sometime to come.

Have tech consumers located in enterprise businesses become the new, blue sky frontier for mature ISVs? If Professor Emilie R. Feldman is correct, then the answer is “yes”. She contends Meg Whitman’s decision to retain operational management control of Hewlett Packard, Enterprises is an example of just this strategy at work.

Readers can listen to a 20 minute discussion with Professor Feldman on this topic by downloading a podcast from the Knowledge@Wharton website. The podcast is titled HP and the Case for Corporate Spinoffs. Bottom line: just 3 years ago, lots of cloud computing champions (and even, as we wrote back on December 11, 2011 in a post to this blog titled VCs that Know Nothing, the VCs financing their early stage cloud efforts) scoffed at enterprise markets as dinosaurs galloping towards extension. But Professor Feldman’s conjecture, if correct, about just why Meg Whitman decided to hold onto the throttle for the enterprise half of the business split, illustrates just how rich a pot of business enterprise markets actually represent to mature ISVs.

In late 2014 a lot of business discussion, and just how to value mature ISVs, amounts to close scrutiny of margins. As Professor Feldman notes, the margins enterprise business consumers are willing to support when they purchase products and services are just much higher than the margins the other side of HP’s business split, meaning the PCs and Printers business, is likely to produce. What’s driving this stampede to higher margin business is, of course, investor demands for not only healthy sales growth, but, even more, sales growth based on profits.

Prominent cloud ISVs, including Google and Salesforce.com (though Amazon.com hasn’t got a seat at this table), have either released recent products clearly designed to deliver revenue at better margins, or transitioned business management to people with deep experience successfully selling to enterprise business consumers. This is a healthy turn of events. There is never anything wrong with making money, and changing direction to pursue buyers with deeper products certainly amounts to a smart move. This writer suspects even Amazon.com will have to join this stampede sometime soon.

Over the weekend of October 4, 2014, Hewlett Packard announced its intention to split into two businesses: one servicing the consumer market, and the other providing solutions and services to enterprise business. While a lot of commentators have spoken on this event, few, if any, have highlighted how this decision reflects the difficulties mature, and large ISVs experience servicing both markets at the same time.

In this writer’s opinion the precedent for one computer technology business successfully servicing both consumer, and enterprise markets was set by IBM during the period from the debut of the PC to Armonk’s decision to spin off the PC business in the late 1990s. For these 10-15 years, IBM successfully serviced its enterprise business customer base with mainframe computers and the software required to run them for a wide range of purposes, while, at the same time, it provided the support for lines of business (LoBs), and their stakeholders, who were eager to acquire the computing power required to decentralize processing from enterprise IT organizations.

But since this period no ISV has managed to service both markets, successfully. True, Microsoft is, once again, attempting to follow in IBM’s footsteps, but the comparative lack of success of its efforts to convince consumer markets to solve their burning need for mobile computing devices with Surface tablets, or Windows Phones, or even the Surface 3 as the hybrid device meeting the personal computing needs of its owners, regardless of whether those needs arise in the office, on the road, or even at home, have not done well at all.

At the same time, the Apple IBM alliance looks like a competitive effort to do the same, albeit via collaborative products and services produced by two ISVs opting to partner together. Neither Apple, nor Google has successfully demonstrated the ability to cater to both markets simultaneously.

Perhaps Dell is another example of one tech computer business servicing both markets, albeit at a much smaller scale than was the case for IBM. But Dell (and/or Lenovo) lacks the big software IP to match the kind of deep hooks into enterprise business exhibited by IBM, or Microsoft. Dell and Lenovo are servicing consumer and enterprise markets for commodities, while Microsoft and the IBM/Apple joint venture just mentioned, not only have offers for the same market, but also for much more promising niche markets where higher margins may be possible.

Seen from this perspective, this writer would hope readers will look differently at HPs weekend announcement. At the same time, readers should maintain a very skeptical attitude about any analyst commentary claiming these two highly distinct markets — consumerized IT and enterprise IT — are actually the same. If they were, perhaps Meg Whitman wouldn’t have come to her decision.

On August 21, 2014, Trish Reagan and Cory Johnson of Bloomberg discussed HP’s latest earnings report during Bloomberg TV’s “In the Loop” daily show. Johnson summed up cautious remarks expressed by Meg Whitman, HP’s CEO, during the webcast of the earnings conference call. Johnson quoted Whitman providing color to the 12%, year-over-year, increase in HP’s sales of PCs as attributable to a burst of buying from companies needing to migrate from Windows XP as the result of Microsoft’s decision to sunset support for this computing platform. Johnson quoted Whitman cautioning her audience the uptick was a unique event, and not to be taken, necessarily, as a signal of a sustainable trend. Johnson called the performance a “one time thing”.

But, perhaps, the uptick in PC sales promises to continue longer than even Whitman has led analysts and investors to expect. After all, during Microsoft’s most recent earnings conference call, Satya Nadella, CEO described the 2014 holiday shopping season as an occasion for shoppers to finally have an opportunity to acquire Windows PCs at price parity with Google Chromebooks.

Nadella based a prediction of lower average sales prices (ASPs) for PCs based, in part, on the lower licensing costs Windows OEMs will likely face as they preload the O/S to their hardware. In turn, these lower licensing costs, Nadella predicted, would be one of the benefits of a new version of the Windows operating system, which he reported to be in the process of being rewritten.

This new version of Windows, in this writer’s opinion, is a “one size fits all” effort for this desktop computing O/S. In other words, Microsoft should be able to distribute the cost of building one O/S, which will run on each of the form factors it targets, across the entire effort, and, thereby, lower costs to its OEM customers. A number of posts have been published, recently, to this blog discussing the likely impact of this new operating system, which Nadella described as capable of supporting the entire range of computing form factors Microsoft presently supports, from the same code.

If a new version of Windows is available for consumers for this year’s holiday season, the increase in unit sales while likely benefit Lenovo and Dell, as well as other so-called “Wintel” OEMs.

At the same time, it is also worth noting Microsoft’s intention to sunset support for Windows Server 2003. Data center sales deliver a bigger revenue contribution for HP, IBM (soon to be Lenovo), and Dell, than consumer PCs. So some segment of the enterprise computing market will likely start migrating out of Windows Server 2003 and up to a platform Microsoft continues to support.

Johnson also remarked cautiously on the decline in profits HP reported for this most recent quarter. In this writer’s opinion it should be easier for HP to return to earlier levels of profitability a quarter or two from now. The real challenge for HP was to return to growing sales. With this most recent quarter they have met the challenge, albeit just barely.

On May 6, 2014 the TechCrunch web site posted an article by Darrell Etherington, Google Maps on Mobile Gets Uber Integration and More. If for no other reason, Mr. Etherington’s article is notable for pointing out what can only be called the self serving nature of how Google opted to include Uber in its new Google Maps App. Mr. Etherington notes: “[the Uber inclusion] is arguably the most interesting part of the update, since it represents Google essentially blessing one tech-focused transportation startup over all others. Uber is also a Google Ventures portfolio company, so it begs the question of whether or not this is some kind of sweetheart deal, though Google always maintains its venture arm operates independently from the rest of the organization.”

On the same day TechCrunch published Mr. Etherington’s article, HP announced the launch of the HP Helion Portfolio of Cloud Products and Services. What I find to be notable in the HP Press release is the mention of new “OpenStack® technology-based products”.

By choosing to actively support, and promote OpenStack, as an alternative to Android for app development targeted to cloud, SaaS solutions, is it safe to say HP sees an opportunity to capture market share from Google? Phrased another way, is it safe to say the developer/OEM community is losing its taste for Android?

Certainly the blatant self serving nature of including Uber in the new Google Maps App is not the first example of this behavior. In fact, regardless of its presumed Open Source roots, one can argue Google’s Chrome O/S is rich in Google Apps and light on anything else.

I think HP’s announcement is a lot more than simply word about another mature ISV presenting the cloud, SaaS market with just another set of products and services built on someone else’s IP. Rather, I think HP is making an effort to compete with Google at the cloud O/S level.

The début of tablets running Windows 8.1 o. 64-bit processors is certainly a significant event for Intel, which promised accelerated efforts to beef up its presence in the mobile computing markets for tablets and smart phones.

But each of these tablets, with WiFi and Cellular data communications capabilities, carries a retail cost of at least $909.00, which makes any of the models more expensive than even Apple’s iPad Air tablets (the iPad Air with 64GB and comparable data communications capabilities carries an online price, via the Apple Store of $829.00 as of March 19, 2014). The effective price penalty, baked into the HP ElitePad, is not a promising development for Intel. I’m not sure whether the higher price is the result of HP passing through higher cost for 64-bit Atom/BayTrail solutions onto the consumer, or not, but the end result will likely be the same — anemic sales for these tablets.

Competitive pricing is certain to be critically important to the success of Intel’s efforts to establish a position in the 64-bit tablet market for CPUs. Apple clearly owns the high end of the BYOD business market for these tablets. I would argue even the HP Elite Pad price mentioned in Shah’s review, $739.99, is still too high. Neither Intel, HP, nor Microsoft will benefit when the cost, for business users, to enable BYOD hardware with a native Windows 8.1 OS, exceeds the cost of the present market leader (let’s not forget the iPad Retina Mini, which includes a 64-bit processor, Wi-Fi and/or cellular connectivity, and 64GBs of storage at a retail price of $729.00). I would argue the Windows OS, while certainly a potentially valuable feature, is not critical for business consumers using Software as a Service (SaaS) cloud offers.

On February 4, 2013, HP announced the addition of an HP Pavilion 14 Chromebook to its product family. Several business quarters have passed since the announcement, but, HP earnings reports (and the webcasts of management presentations), to the best of my knowledge, have not included notice of significant sales of this product line.

HP’s latest quarterly earnings report and Q1 2014 webcast is no exception. Beyond a mention of what sounded like “multi O/S” device sales, there was no mention of how HP’s Chromebook products contributed to their revenue performance.

But there’s little remaining doubt about the Chromebooks vs. Windows laptops & notebooks competition. Chromebooks are making themselves felt, but, I think, in lower end consumer sales in the Americas and Western Europe, and, across the board, in emerging markets.

On Saturday, February 22, 2014, Tom Warren wrote an article titled Microsoft combats Chromebooks by cutting Windows licensing fees by 70 percent, which was published on The Verge website. Warren writes: “Microsoft is reportedly cutting Windows 8.1 license costs by 70 percent for PC makers. Bloomberg News reports that the cuts are targeted at devices that retail for less than $250, in a move designed to combat rival low-cost tablets and Chromebooks” (quoted from Warren’s article, a link to which has been provided in this paragraph). It’s not likely Microsoft would move forward on a price cut for its Window O/S if sales of Chromebooks were still little more than a ding to their bottom line. But just where may this impact be occurring, if not in familiar enterprise IT markets?

On December 29, 2013, in an article titled Chromebook Sales Punching Through And Gobbling Market Share, Seth Colaner writes ” … the NPD Group has some startling numbers on commercial computing device sales. From January-November 2012, Chromebook channel sales were negligible at just 0.2% of the total market, but this year over those same months that percentage leapt to 9.6% of all computing devices. They also accounted for 21% of notebook sales. Much of Chromebooks’ success appears to be at the expense of Windows-based machines, which is likely due to a combination of a lukewarm response to Windows 8 and Chromebooks’ significantly lower prices.” Colaner also notes strong sales of Chromebooks on Amazon.com: ” two of the three top-selling laptops on Amazon.com this holiday season were Chromebooks–specifically units from Samsung and Acer.”

Investors may want to factor this information into their view of Microsoft, specifically, to conclude Chromebooks have, indeed, become a meaningful competitor to notebooks running the Microsoft Windows O/S. As to whether Microsoft’s decision to cut the cost of the O/S for its OEMs is good, or bad news, it’s too early to say. The price cuts may, in fact, shore up sales in emerging markets and the lower end of the consumer market, which would represent a win for Microsoft. After all, the Chromebook appears to already own 21% of notebook sales, per Mr. Colaner, right?

Disclosure: I’m long Microsoft, but neither invested in Google, nor any other publicly traded business mentioned in this post.

On November 14, 2013, Hewlett Packard reported on its business performance for the fourth quarter of 2013. Included along with the otherwise positive assessments of current performance from its CEO, Meg Whitman, were some forward looking remarks more likely to be made by a CEO of a business somewhat unsure of its future performance.

These remarks can be found in the Q4 2013 HP Quarterly Earnings Webcast. Katy Huberty of Morgan Stanley asked the first question: ” . . . Does the fiscal 4th quarter revenue performance give you any confidence that there is, at least, an opportunity to perform better on the revenue line than you had originally planned for fiscal 14.” Meg Whitman, CEO, replied to this question. She emphasized that ” . . . the characterization that we laid out at the Security Analyst meeting just six weeks ago remains the same.”

Ms. Whitman used the next couple of sentences of her reply to add a couple of specific impediments to a “better” forecast for fiscal 2014, which would otherwise make sense following on a quarter where almost all targeted objectives had been achieved. These impediments include ” . . . macro economic headwinds, almost across the board . . . “, and a need to further improve their “go to market” strategy. What caught my attention was a curious comment: Ms. Whitman noted ” . . . it’s prudent to characterize the business the exact same way we did at the Security Analyst Meeting.”

So, if the CEO is not prepared to provide any forward guidance beyond the ” . . . exact same way we did at the Security Analyst Meeting”, then I can’t help but think management is either fundamentally unsure about how “macro economic headwinds” are going to impact the bottom line, or, somehow, the fourth quarter, 2013 performance was not nearly as impressive as it would otherwise appear to be.

At least 2 weeks remained in the actual fiscal fourth quarter after the Security Analyst Meeting. Based on Ms. Whitman’s comments, nothing new has transpired since the meeting. I’m skeptical about the HP 4th quarter 2013 report based on these remarks.

A review of the Elite Book Folio product line on the HP website produces supports three important observations:

Many enterprise businesses, as Gartner, Forrester and other PC Industry Analysts correctly forecasted earlier in 2013, are presently in a long overdue buying cycle, ostensibly to replace old devices. The EliteBook Folio product line is not targeted to consumers. The lowest cost device in this product set has an advertised price (as of November 27, 2013) of $849.00

The Windows 8 Touch Operating System is not yet in demand, at least for HP’s customers for this product. None of the EliteBook Folio notebook PCs include a touchscreen monitor. The EliteBook Folio can be purchased with a downgrade to the Windows 7 64 bit Professional Operating System from Windows 8 Pro; this option is promoted on the HP website for these products

Enterprise Business continues to standardize on Intel CPUs for the type of computing task best handled with a notebook like the HP EliteBook Folio. The CPUs are either Intel Core i5 or i7, although one device does include the Intel Core i3 processor

The notebooks in this product line are neither particularly light, nor especially small in size. Each EliteBook includes a backlit LED display.

The apparent lack of interest on the part of EliteBook customers in the Windows 8 Operating System is worth some further attention:

Microsoft® certainly has an opportunity to persuade enterprise buyers to migrate to Windows 8. A successful effort to convince enterprise customers to adopt the new O/S would provide Microsoft with further upside from sales of Operating Systems in an otherwise declining product segment.

But the task looks to require a better effort to inform consumers about the benefits of this touch operating system, so they will adopt the Windows 8 computing experience. To their credit, Microsoft has clearly demonstrated a substantial amount of experience with this type of work. Mark Kashman, a Senior Product Manager on the SharePoint Team took a step in this direction with a post published on November 19, 2013 to the Office Blog: SharePoint Online introduces the Touch Design mobile experience.